UKmust decide destiny soon or face the reality

The milk quota system is going to change. The only questions are what will replace it and when.

Shelley Wright reports on the current thinking

EVERYONE involved in the UK dairy industry must decide very soon on the way they want European quota policy to evolve. Otherwise, according to quota broker Ian Potter, change will simply be forced on them.

He is in the middle of a series of farmer meetings discussing the issue. Using information from a report by European agricultural analysts, Eurinco, Mr Potter concludes that the existing quota system will disappear by 2010. But he suggests that the replacement system could be agreed by the European commission as early as next year.

The report lists five options:

&#8226 Status quo – keeping the current system.

&#8226 Referendum – pull out of Europe and look after our own interests.

&#8226 Increase quotas to the point where they become obsolete.

&#8226 Two-tiered quota system.

&#8226 Scrap quotas and replace with headage payments.

Mr Potter rules out the status quo option. "The present system is not sustainable. GATT means we cant continue to operate "Fortress Europe" to keeping prices high by subsidising production."

He points out that there are still farmers who refuse to accept that their production is subsidised, because they dont get a brown envelope with a cheque from MAFF.

"But every UK producer is subsidised by about 4p a litre, or £200 a cow for an average yielder through export subsidies, import tariffs and intervention. And EU milk production is still about 15% higher than demand. GATT means we cannot go on dumping subsidised product on the world market, and our prices have to fall," Mr Potter insists.

He also rules out the possibility of the UK withdrawing from the EU. "We have to accept that we are part of Europe and that is not going to change."

The third option, increasing quotas, is attractive, Mr Potter believes. "This could be phased-in gradually. Every increase in quota would raise production and so cause a fall in milk price which is exactly what is required," he says.

But this would be politically and socially unacceptable to the majority of EU member states who are determined to maintain their rural economies and would resist downward pressure on milk prices.

The final two options, a two-tier quota system or headage payment scheme, are the most likely.

"The two-tier approach, or A and B quota, could suit the UK very well. The B milk would be exported from the EU, without subsidies, at the world market price – currently about 16p/litre.

"This could be phased in with A quota gradually being cut to meet domestic needs, while at the same time the B quota could increase giving producers unlimited capacity for expansion so long as they could find markets," Mr Potter says.

The system offers a transition route to world milk prices and has been supported by the Danes, Dutch and French. But Mr Potter says that commission officials have already said it could be impossible to control and open to fraud.

Headage payments are therefore most likely. But he warns that, though this scheme is attracting growing support across Europe, it could be extremely damaging to the UK.

"This goes back to the original McSharry proposals with a headage limit of 40 cows. Producers can sell milk wherever they like, prices would fall, but their incomes would be protected by the headage payment.

"This would suit other EU countries because their average herd size is only about 18 cows, and would fit well with the policy of keeping people on farms. But it could be disastrous for the UK where the average herd size is 68."

"Our average herd size is 68. If people were only going to receive payments if they kept less than 40 animals then it would really stifle our industry," he says.

But producers must accept that change is inevitable. Everyone involved should start deciding now how to make the change as beneficial as possible for the UK.